2011 (12) TMI 556 - AT - Income Tax

Tribunal upholds CIT(A) decision on share trading loss, derivative profit aggregation. Section 73 Explanation, Section 14A disallowance referred back.

The Tribunal upheld the CIT(A)'s decision on aggregating share trading loss and derivative profit before applying Explanation to Section 73. It also ... Share trading loss and profit from derivative transactions - Held that:- We are of the view that trading of shares which is done by delivery transactions are not hit by Sec.43(5) as speculation. Similarly, derivative transaction in shares profit/loss is also not hit by Sec.43(5) of the I. T. Act, which deals about speculation transaction. As such, both profit/loss from all the share delivery transactions and derivative transactions are having the same meaning, so far as, Sec.43(5) of the I. T. Act is concerned. When once we held that the transactions done by delivery as well as the transactions of derivatives are not hit by section 43(5) of the Act it is in our considered view that the aggregation of the share trading loss and profit from derivative transactions should be done before the application of the Explanation to section 73 of the IT Act is applicable. Addition u/s 14A - Held that:- AO has not disallowed any expenditure on account of interest. Therefore, respectfully following the decision of the Hon’ble Bombay High Court in the case of Godrej and Boyce Mfg. Pvt. Ltd. (2010 (8) TMI 77 - BOMBAY HIGH COURT) we consider it to set aside this issue to the file of AO and direct the AO to determine the disallowance u/s 14A of the IT Act after giving a reasonable opportunity of being heard to assessee. The assessee is also at liberty to establish whether there is any nexus of the expenditure issue and the exempted dividend income. Issues Involved:1. Applicability of Section 43(5) of the I.T. Act to transactions in derivatives.2. Deletion of disallowance and addition of Rs. 2,87,26,836/- treated as deemed speculation loss.3. Applicability of Explanation to Section 73 of the I.T. Act to delivery-based share transactions.4. Deletion of addition of Rs. 83,662/- made under Section 14A read with Rule 8D.Issue-wise Detailed Analysis:1. Applicability of Section 43(5) of the I.T. Act to transactions in derivatives:The Assessing Officer (AO) argued that even though Section 73 deems the purchase and sale of shares as speculative business, Section 43(5)(d) excludes trading in derivatives from being deemed speculative. Thus, losses from non-derivative share transactions, deemed speculative, cannot be set off against profits from derivative transactions, which are not speculative under Section 43(5)(d). The AO referenced the Supreme Court decision in Appollo Tyres Ltd. and other tribunal decisions to support this view. The CIT(A) disagreed, stating that both delivery-based share transactions and derivative transactions are not speculative under Section 43(5), and thus, their net result should be considered before applying Explanation to Section 73. The Tribunal upheld the CIT(A)'s view, agreeing that both types of transactions should be aggregated before considering the applicability of Explanation to Section 73.2. Deletion of disallowance and addition of Rs. 2,87,26,836/- treated as deemed speculation loss:The AO treated the loss from share trading as deemed speculative under Explanation to Section 73 and did not allow it to be set off against derivative profits. The CIT(A) directed the AO to aggregate the share delivery loss with share derivatives profit, concluding that the net result was a profit, thus not invoking Explanation to Section 73. The Tribunal agreed with the CIT(A), noting that the aggregation should be done before applying Explanation to Section 73, and upheld the deletion of the disallowance.3. Applicability of Explanation to Section 73 of the I.T. Act to delivery-based share transactions:The AO argued that the loss from share trading should be treated as deemed speculative under Explanation to Section 73. The CIT(A) and Tribunal disagreed, stating that delivery-based share transactions are not speculative under Section 43(5), and thus, their net result should be considered before applying Explanation to Section 73. The Tribunal upheld the CIT(A)'s view, agreeing that the net result of all transactions should be considered before applying the deeming fiction of Explanation to Section 73.4. Deletion of addition of Rs. 83,662/- made under Section 14A read with Rule 8D:The AO disallowed Rs. 83,662/- as expenses related to earning exempt dividend income. The CIT(A) deleted the disallowance, stating that all shares were held as stock-in-trade, and no expenses were incurred to earn the dividend. The Tribunal observed that the AO's allocation was not based on any nexus between the dividend income and the expenditure. It noted that the CIT(A)'s reliance on the Kerala High Court decision was misplaced, as it related to interest expenditure. The Tribunal set aside the issue to the AO to determine the disallowance under Section 14A after giving the assessee a reasonable opportunity to be heard.Conclusion:The Tribunal upheld the CIT(A)'s decision on the aggregation of share trading loss and derivative profit, agreeing that both should be considered before applying Explanation to Section 73. It also set aside the issue of disallowance under Section 14A to the AO for reconsideration. The appeal was allowed in part for statistical purposes.